2019 (11) TMI 586 - AT - Income Tax

Disallowance for the provision for warranty - HELD THAT - Undisputedly the AO admitted the claim of the assessee by allowing of provision for warranty to the extent of 6.4% instead of 8% claim by the assessee by resorting to arithmetic calculation by taking average of the last four years prior to the assessment year under consideration. CIT(Appeals) without bifurcating the commission income and provision for warranty income affirmed the addition only on accrual basis. The assessee contended that the identical issue has already been settled in the judgment cited as CIT Vs. Smt. Paramjeet Luthra 2014 (9) TMI 725 - DELHI HIGH COURT in favour of the assessee as relied by the Id counsel for the assessee the ratio of which is that in case of provision for warranty services the entire income could not be offered for taxation for the year under assessment when the assessee had few obligations for providing after sales maintenance services and the necessary' expenses is required to be kept for the same - we restore the quarrel to the file of the AO. AO is directed to decide the issue afresh in light of the directions by the coordinate bench given in earlier A.Ys.

Summary

Issues:
Dispute over disallowance for provision for warranty in two separate orders by Commissioner of Income Tax [Appeals] for assessment years 2011-12 and 2012-13.

Analysis:
1. The appeals were filed against two separate orders of the Commissioner of Income Tax [Appeals] for assessment years 2011-12 and 2012-13, both concerning disallowance made for the provision for warranty.
2. The assessee's activity involved the sale of equipment and free warranty services as per the Sales Representation Agreement, with income received from Associated Enterprise for services rendered.
3. The Assessing Officer made additions for provision for warranty in both assessment years due to lack of justification from the assessee.
4. The ld. CIT(A) upheld the additions, citing lack of scientific basis for the provision of warranty and failure to justify the link between warranty expenses and commission income.
5. The Tribunal considered past decisions and found that the provision for warranty should be based on a scientific method, not just arithmetic calculations, and that the income accrued at the time of receiving commission should be accounted for in the year of accrual.
6. Following precedents, the Tribunal directed the Assessing Officer to reconsider the issue in line with the directions given in earlier assessment years.
7. Ultimately, both appeals of the assessee were allowed for statistical purposes, and the matter was remanded back to the Assessing Officer for fresh consideration.

This detailed analysis of the judgment highlights the key issues, arguments, and decisions made by the authorities and the Tribunal regarding the disallowance for provision for warranty in the respective assessment years.